1997 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

9-19-1997

Shell Oil Co v. Babbitt

Precedential or Non-Precedential:

Docket

97-7035

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Recommended Citation

"Shell Oil Co v. Babbitt" (1997). 1997 Decisions. Paper 223.

http://digitalcommons.law.villanova.edu/thirdcircuit_1997/223
Filed September 19, 1997

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 97-7035

SHELL OIL COMPANY,

 Appellant

v.

BRUCE BABBITT; THE UNITED STATES

DEPARTMENT OF THE INTERIOR

On Appeal from the United States District Court

for the District of Delaware

(D.C. Civ. No. 95-00492)

Argued August 14, 1997

BEFORE: STAPLETON, GREENBERG, and COWEN,

Circuit Judges

(Filed: September 19, 1997)

 L. Poe Leggette (argued)

 Jackson & Kelly

 2401 Pennsylvania Avenue, N.W.

 Suite 400

 Washington, D.C. 20037

 Attorneys for Appellant

 Lois J. Schiffer

 Assistant Attorney General

 Gregory M. Sleet

 United States Attorney

 Wilmington, Delaware 19899

 Patricia C. Hannigan

 Assistant United States Attorney

 Wilmington, Delaware 19899

 J. Carol Williams

 Michael J. Robinson

 Robert L. Klarquist (argued)

 Attorneys, Department of Justice

 Environment & Natural Resources

 Division

 P.O. Box 23795, L'Enfant Station
 Washington, D.C. 20026

 Geoffrey Heath

 Lisa K. Hemmer

 Sarah L. Inderbitzin

 Office of the Solicitor

 Department of the Interior

 Washington, D.C. 20240

 Attorneys for Appellee

OPINION OF THE COURT

GREENBERG, Circuit Judge.

This case is before this court on an appeal by Shell Oil

Co. ("Shell") from an order of the district court which

sustained an order of the Department of the Interior

Minerals Management Service ("MMS") requiring Shell to

produce certain documents. The district court had

jurisdiction under 28 U.S.C. S 1331, and we have

jurisdiction under 28 U.S.C. S 1291. This appeal turns on

issues of statutory and regulatory interpretation.

I. FACTUAL AND PROCEDURAL HISTORY

Congress has empowered the Department of the Interior

to enter into and administer leases to develop oil and gas

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resources on federal lands. Congress enacted the Federal

Oil and Gas Royalty Management Act ("FOGRMA") in 1983,

to strengthen the ability of the Secretary of the Interior

("Secretary") to collect oil and gas royalties by developing a

comprehensive system of royalty management in order

properly to collect and account for all royalties. 30 U.S.C.

SS 1701 et seq. FOGRMA authorizes the Secretary to "audit

and reconcile, to the extent practicable, all current and

past lease accounts for leases of oil and gas and take

appropriate actions to make additional collection or refunds

as warranted." Section 101(c)(1), 30 U.S.C. S 1711(c)(1).

Section 103(a) of FOGRMA, 30 U.S.C. S 1713(a), deals with

maintenance of information and production of records:

 A lessee, operator, or other person directly involved in

 developing, producing, transporting, purchasing, or

 selling oil or gas subject to this chapter through the

 point of first sale or the point of royalty computation,

 whichever is later, shall establish and maintain any

 records, make any reports, and provide any

 information that the Secretary may, by rule, reasonably

 require for the purposes of implementing this chapter
 or determining compliance with rules or orders under

 this chapter. Upon the request of any officer or

 employee duly designated by the Secretary or any State

 or Indian tribe conducting an audit or investigation

 pursuant to this act, the appropriate records, reports,

 or information which may be required by this section

 shall be made available for inspection and duplication

 by such officer or employee, State, or Indian tribe.

Section 3(12) of FOGRMA defines "person" as "any

individual, firm, corporation, association, partnership

consortium, or joint venture." 30 U.S.C. S 1702(12). Thus,

Shell as a corporation can be a person within section 103(a)

and its implementing regulations.

The Secretary has delegated royalty enforcement

responsibilities to the Director of the MMS. MMS

regulations require "each lessee, operator, revenue payor or

other person [to] make and retain accurate and complete

records necessary to demonstrate that payments of rentals,

royalties . . . and other payments . . . are in compliance

with lease terms, regulations, and orders." 30 C.F.R.

 3

S 212.51(a). The "lessee, operator, revenue payor, or other

person required to keep records" must maintain them for

six years and make them available for inspection. 30 C.F.R.

S 212.51(b)-(c).

Shell Western E & P, Inc. ("Shell Ex") is primarily a

producer of oil and is a wholly owned subsidiary of Shell,

which primarily markets oil. App. at 175, 181. Shell Ex

produces oil from land within 32 federal leases in California

issued under the Mineral Lands Leasing Act, 30 U.S.C.

S 181, and pays royalties to the federal government on the

oil produced.1 App. at 181. Shell Ex sells much of this oil

to Shell pursuant to an agreement dated January 1, 1985,

under which Shell pays its posted prices for that

geographical area or uses third-party price postings, as was

done here because Shell does not post prices for California.

App. at 175-76, 290.

The Secretary can delegate audit authority for federal

leases to the state in which they are located. 30 U.S.C.

S 1735(a). Pursuant to this delegation of authority, the

California State Controller's Office ("State") reviewed Shell

Ex's onshore leases in California for the period from

January 1, 1985, to December 31, 1988. The State

requested that Shell provide records relating to its

disposition of federally derived oil purchased from Shell Ex,

but Shell declined to comply with this request on the basis
that the transactions between Shell Ex and Shell

constituted the point of royalty computation. App. at 181-

82.

On April 3, 1990, the Denver office of the Royalty

Compliance Division of MMS ordered Shell to turn over the

documents requested by the State, which included all

documents regarding the disposition of federally derived oil,

the sales contracts and verification of all revenue from sales

of this oil to third parties, and a detailed schematic showing

the pipeline system used to transport this oil. App. at 168-

69. MMS stated in the order that data regarding Shell's

arm's-length sales of the oil were necessary to determine

_________________________________________________________________

1. For onshore leases like the ones at issue here, the state in which the

leases are located receives 50% of the royalties. 30 U.S.C. S 191.

 4

whether the non-arm's length price Shell paid Shell Ex was

acceptable for royalty valuation purposes.

Shell appealed this order to the Director of MMS, who

sustained the order of the Denver office. The Director ruled

that the gross proceeds rule2 required that Shell be

considered the "lessee" whenever it resold oil purchased

from Shell Ex, and thus the requested documents were

necessary to determine the proper royalty valuation. App. at

183-84.

Shell then appealed from the Director's decision to the

Interior Board of Land Appeals ("IBLA") which originally

ruled in its favor. Shell Oil Co., 130 IBLA 93 (1994). In its

opinion the IBLA ruled that under the March 1, 1988

revisions to the MMS regulations, Shell's proceeds are only

relevant if Shell is a "marketing affiliate" for Shell Ex. See

30 C.F.R. S 206.102(b)(1)(i) (when oil sold to marketing

affiliate, lessee's "gross proceeds" is value obtained by

marketing affiliate in arm's-length sale of oil). The IBLA

found that Shell was not a marketing affiliate of Shell Ex,

as defined in 30 C.F.R. S 206.101, and thus information

relating to Shell's proceeds was not relevant. 130 IBLA at

96-97.

The IBLA reversed itself after MMS petitioned for

reconsideration. Shell Oil Co. (On reconsideration), 132 IBLA

354 (1995). The IBLA ruled that the marketing affiliate

issue was irrelevant to whether the gross proceeds rule

applied and information regarding Shell's proceeds from the

oil was necessary to determine the value of production. Id.

at 356-58. The IBLA later denied Shell's petition to
reconsider this decision.

Shell then filed this suit in the district court in Delaware

seeking a declaration that MMS could not order it to

_________________________________________________________________

2. This rule was amended on March 1, 1988, and now states that "under

no circumstances shall the value of production, for royalty purposes, be

less than the gross proceeds accruing to the lessee for lease production,

less applicable allowances determined pursuant to the subpart." 30

C.F.R. S 206.102(h). Previously, the rule stated that "[u]nder no

circumstances shall the value of production . . . be deemed to be less

than the gross proceeds accruing to the lessee from the sale thereof

. . . ." 30 C.F.R. S 206.103 (1987).

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produce the documents in question. Thus, Shell requested

an order vacating the MMS's order. The Secretary of the

Interior unsuccessfully sought to have the suit dismissed or

transferred on venue grounds. Shell Oil Co. v. Babbitt, 920

F. Supp. 559 (D. Del. 1996). The government then filed a

counterclaim seeking enforcement of the MMS order. After

both parties moved for summary judgment, the court ruled

in favor of the government and upheld the IBLA's decision

on November 14, 1996. Shell Oil Co. v. Babbitt, 945 F.

Supp. 792 (D. Del. 1996). The district court held that

FOGRMA section 103(a), 30 U.S.C. S 1713(a), defined only

the class of persons from which the Secretary can obtain

documents and did not limit, as Shell argued, the type of

documents to be maintained. The court also found that

Shell was covered by 30 C.F.R. S 212.51 as an"other

person" despite the fact that Shell did not have paying or

operating responsibility on the lease.

Shell then filed a timely notice of appeal. Shell now

argues that neither section 103(a) of FOGRMA nor 30

C.F.R. S 212.51 gives the Secretary authority to seek

documents relating to events after the first sale of oil from

a federal lessee, regardless of whether the sale is to an

affiliated company. We review the district court's

interpretation of both statutes and regulations on a de novo

basis. United States v. Brace, 41 F.3d 117, 122 (3d Cir.

1994); Sheet Metal Workers, Local 19 v. 2300 Group, Inc.,

949 F.2d 1274, 1279 (3d Cir. 1991). Nevertheless, if

Congress has not spoken directly to the question in issue,

we will defer to a reasonable construction of a statute by

the agency which administers it. Chevron U.S.A. Inc. v.

Natural Resources Defense Council, Inc., 467 U.S. 837, 842-

43, 104 S.Ct. 2778, 2781-82 (1984). Moreover, we will

uphold an agency's interpretation of its own regulations

"unless it is plainly erroneous or inconsistent with the
regulation." Thomas Jefferson Univ. v. Shalala, 512 U.S.

504, 512, 114 S.Ct. 2381, 2386 (1994).3 

_________________________________________________________________

3. A challenge to the validity of a subpoena for similar documents

covering 1989-96 is pending in United States v. Shell Oil Co., Misc. No.

31372 (C.D. Cal.). Shell also is challenging an MMS order to pay

additional royalties for a portion of the time period at issue here. Shell

Oil Co. v. Babbitt, No. 96-CV-1078-H (N.D. Okla.).

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II. DISCUSSION

A. Section 103(a) of FOGRMA

Shell argues that section 103(a) does not give the

Secretary the authority to seek the requested documents

relating to Shell's disposition of the oil it bought from Shell

Ex. It contends that the Secretary and the district court

erred in determining that the underlined portion of section

103(a) -- "A lessee, operator, or other person directly

involved in developing, producing, transporting,

purchasing, or selling oil or gas subject to this chapter

through the point of first sale or the point of royalty

computation, whichever is later, shall establish and

maintain any records . . ." 30 U.S.C. S 1713(a) (emphasis

added) -- limited only the class of persons from whom the

Secretary could request documents and did not limit the

type of document involved. Shell contends that the phrase

"through the point of first sale or the point of royalty

computation" limits the type of documents, not the type of

person.

In a case almost directly on point, the Court of Appeals

for the Tenth Circuit ruled that MMS has the authority to

request exactly the type of documents at issue here,

records of subsequent sales by a company which

purchased oil from an affiliated federal lessee.4 Santa Fe

Energy Prods. Co. v. McCutcheon, 90 F.3d 409 (10th Cir.

1996). While the Santa Fe court did not specifically address

the argument Shell raises here, it ruled that section 103(a)

covers the first purchaser of oil produced under a federal

lease because such a purchaser is a " `person directly

involved in . . . purchasing . . . oil or gas subject to this

chapter through the point of first sale or royalty

computation.' " Id. at 414 (quoting 30 U.S.C. S 1713(a)).

The Secretary urges precisely this interpretation of

FOGRMA here. We agree with both the Secretary and the

Court of Appeals for the Tenth Circuit. Further, wefind

that this interpretation is the most natural reading of the
_________________________________________________________________

4. Shell does not distinguish this case except to note that the court did

not discuss the legislative history of FOGRMA. Br. at 32 n.20.

 7

statute,5 and thus the intent of Congress is clear without

resort to the legislative history. See Chevron, 467 U.S. at

842-43, 104 S.Ct. at 2781-82. We therefore do not

comment on Shell's exhaustive discussion of the legislative

history of FOGRMA except to say that we do not find

sufficient remarks dealing with the narrow issue in this

case to support its position. Id. at 862, 104 S.Ct. at 2791.

Since the legislative history does not compel a different

result, we must find the plain language of the statute

dispositive. Consumer Prod. Safety Comm'n v. GTE Sylvania,

Inc., 447 U.S. 102, 108, 100 S.Ct. 2051, 2056 (1980).

B. Implementing Regulation

Shell also argues that the implementing regulation for

section 103 of FOGRMA, 30 C.F.R. S 212.51, does not apply

in this case. Section 212.51(a) provides:

 Each lessee, operator, revenue payor, or other person

 shall make and retain accurate and complete records

 necessary to demonstrate that payments of rentals,

 royalties, net profit shares, and other payments related

 to offshore and onshore Federal and Indian oil and gas

 leases are in compliance with lease terms, regulations,

 and orders. Records covered by this section include

 those specified by lease terms, notices and orders, and

 by the various parts of this chapter. Records also

 include computer programs, automated files, and

 supporting systems documentation used to produce

 automated reports or magnetic tape submitted to the

 Minerals Management Service (MMS) for use in its

 Auditing and Financial System (AFS) and Production

 Accounting and Auditing System (PAAS).

_________________________________________________________________

5. We do not find the "acute redundancy" which Shell argues this

reading of the statute creates. Br. at 25. The phrase "directly involved"

in section 103(a) of FOGRMA modifies a number of activities in addition

to purchasing oil (developing, transporting, selling). Shell's argument

that the parties involved in the first sale of oil necessarily are 

directly

involved in purchasing oil is true, but someone directly involved in

transporting oil is not, and the phrase "through the point of first sale" 

is

therefore necessary to limit the class of people required to maintain
records. Without the limitation, section 103(a) could apply far

downstream.

 8

Shell argues that only those documents specified in the

latter two sentences of section 212.51(a) can be requested.

The Secretary contends that the regulation creates a duty

to maintain all documents "necessary to demonstrate" that

the lessee is complying with royalty requirements and that

the second and third sentences are illustrations rather than

an exhaustive list. The Secretary contends that the

language of the regulation neither states nor implies that

the examples listed are complete. It merely says that

required records "include" those listed. See 30 C.F.R.

S 212.51(a).

Shell argues that the Secretary's "original intent" in

drafting the regulation supports its view. Shell's main

support for this "intent" argument is that the preamble

does not explicitly deny the reading Shell urges. We,

however, do not find that the preamble resolves the issue.

Shell also argues that the Secretary's statements to the

Office of Management and Budget under the Paperwork

Reduction Act ("PRA"), 44 U.S.C. SS 3501 et seq., do not

support the Secretary's current interpretation of the

regulation. Shell does not mention that the PRA does not

apply to the collection of information during FOGRMA

audits. See Phillips Petroleum Co. v. Lujan, 963 F.2d 1380,

1387 (10th Cir. 1992) (discussing 44 U.S.C. S 3518(c)(1)(B)

PRA exemption for administrative investigations).

Shell also argues that it is not covered under the

regulation because the last sentence of section 212.51(b)

states: "Lessees, operators, revenue payors, or other

persons shall maintain the records generated during the

period for which they have paying or operating

responsibility on the lease for a period of 6 years." Shell

argues that this 6-year limit only applies to "lessees,

operators, revenue payors, or other persons" who have

"paying or operating responsibility on the lease" and since

Shell does not have such responsibility the limit does not

apply to it. Thus, according to Shell, either Shell has to

keep records forever, or it does not have a duty to keep

records at all. In other words, in its view Shell is not an

"other person" under section 212.51(a). Since FOGRMA

itself also imposes a 6-year record-keeping limitation

period, 30 U.S.C. S 1713(b), Shell contends that section

 9
212.51 also applies only to persons having paying or

operating responsibility.

While this is an intricately constructed argument, it

ultimately collapses under its own weight. We acknowledge

that there is some ambiguity in section 212.51(b), but Shell

proposes that we resolve that ambiguity by distorting

section 212.51(a). The plain language of section 212.51(a)

makes clear that it applies to "other persons" in addition to

operators and payors, and it does not make sense to read

other persons as "other persons with paying or operating

responsibility."

Shell has failed to demonstrate that the agency's

interpretation of section 212.51 is "plainly erroneous or

inconsistent with the regulation." Thomas Jefferson Univ.,

512 U.S. at 512, 114 S.Ct. at 2386. We therefore must give

the interpretation "controlling weight," id., and affirm the

district court's ruling that section 212.51 applies to Shell

and MMS has authority to order the production of the

documents at issue.

C. 1988 Regulatory Amendments

We address one final issue. On March 1, 1988, amended

royalty valuation regulations became effective. These

regulations apply only to oil produced after their effective

date, see Santa Fe, 90 F.3d at 413, which is only the last

ten months of the period at issue here. For the bulk of the

period in this case, Santa Fe is applicable, and we follow it

and hold that the Secretary clearly has authority to seek

the requested documents. For the last ten months,

however, we must consider the effect of the new

regulations, an issue Sante Fe did not address explicitly.

Under 30 C.F.R. S 206.102(b)(1)(i), when oil is sold or

transferred by a federal lessee to its marketing affiliate,

which then resells it, the value of the oil for royalty

purposes is the value the marketing affiliate receives from

an arm's-length purchaser. Shell, however, is not a

marketing affiliate of Shell Ex because it does not acquire

and market oil only from Shell Ex. See 30 C.F.R. S 206.101.

Non-arm's-length transactions, other than with marketing

affiliates, are covered by 30 C.F.R. S 206.102(c), which lists

 10

several different methods of royalty computation. The IBLA

originally found that the third-party posted prices used in

the sales from Shell Ex to Shell met the requirements of 30

C.F.R. S 206.102(c)(2). Given this holding, MMS did not
need the documents requested because the gross proceeds

rule is only applicable to an affiliate when it is a marketing

affiliate, thus distinguishing Santa Fe. 130 IBLA at 97. On

reconsideration, however, the IBLA determined that the

marketing affiliate distinction was not relevant to this case

because the gross proceeds rule, 30 C.F.R. S 206.102(h),

supersedes all other royalty calculation methods. 132 IBLA

at 355-56.

It is undisputed that Shell paid Shell Ex a "market price"

for the federally derived oil it purchased. The gross

proceeds rule requires that the federal royalties be based,

at a minimum, on what the lessee receives for the oil, not

the "market price" of the oil. If Shell Ex sold the oil at a

premium above the market price, federal royalties would be

based on that premium price. Shell appears to be arguing

that it can avoid this result by purchasing the oil from

Shell Ex at the market price and then reselling it at a

premium itself. MMS is entitled to documents which will

allow it to determine if Shell Ex is undervaluing oil for

royalty purposes by first transferring it to Shell. Whether or

not that is so we are satisfied that for auditing purposes

Shell must disclose the records the State requested.

III. CONCLUSION

We conclude by emphasizing that our ruling is narrow.

We do not find that MMS can impute the proceeds received

by Shell to Shell Ex. We will leave the determination of that

issue to a case in which it is presented. Thus, we agree

with Shell that this appeal "does not directly concern the

proper value of royalties on oil produced from [Shell Ex's]

32 leases." Br. at 7. Consequently, we hold only that given

an administrative agency's broad investigative authority,

see United States v. Morton Salt Co., 338 U.S. 632, 642-43,

70 S.Ct. 357, 364 (1950), and the statutory and regulatory

scheme we have described, MMS is authorized to order the

production of documents relating to Shell's arm's-length

sales of the oil it purchased from Shell Ex in non-arm's-

 11

length transactions. In the circumstances, we will affirm

the order of the district court entered November 11, 1996.

A True Copy:

Teste:

 Clerk of the United States Court of Appeals

 for the Third Circuit

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